VINCE SCULLY | from Life Sherpa

I'm excited to share this podcast episode with Vince Scully from Life Sherpa as we delve into the recipe for creating a sustainable ETF portfolio. It's not all about finding the highest return.

We talk about the average punter's view of risk in the stock market. Risk isn't just about the chance of a company going bankrupt and losing all your hard-earned dollars. Instead, risk is about the variability of outcomes and the probability of achieving your financial goals.

The finance industry often conflates risk with volatility. Vince clarified that while volatility and risk are related, they're not the same thing. The higher the volatility, the wider the range of outcomes in achieving your goals. Which means that achieving your goals requires you to define the level of risk you're comfortable with so that you don't cash out at the wrong time. This is crucial for investors when planning for specific financial milestones in the future.

Vince explains the delicate balance between expected returns and the market ups and downs (or volatility) that you can tolerate. A 100% equity portfolio might promise the highest return, but it comes with significant volatility. On the other hand, a diversified portfolio with a mix of equities, bonds, infrastructure, and real estate can offer a more stable journey without sacrificing too much on returns.

Our emotions directly impact our investing outcomes. Vince highlighted the importance of understanding your tolerance for risk and the capacity to endure market fluctuations. He cautioned against letting emotions dictate investment decisions, emphasizing that successful investing involves staying the course, especially during downturns.

The market will provide the return, but it's our responsibility to ensure that it ends up in our pockets. Success in investing lies in understanding emotional behaviors, defining our financial timeline, and maintaining a balanced and diversified portfolio.

Find out more about Life Sherpa

EPISODE TRANSCRIPT

Chloe (1s):

Shares For Beginners,and Phil Muscatello and Finpods are authorized reps of MoneySherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

Vince (12s):

The more of a heavy lifting you want the return to do, the more risk you have to be prepared to take and the more uncertain achieving that outcome is. So you can move any two of those three levers. And that's the real piece about investing that a lot of people jump straight for. I've got $5,000 to invest, what should I buy? Whereas there's

Phil (36s):

A couple of

Vince (37s):

Steps. There's a lot of steps in the way. Yeah. And the answer will not be the same at all. Everyone.

Phil (43s):

G'day And, welcome back to Shares for Beginners. I'm Phil. Muscatello ETFs can be a good alternative to picking your own share portfolio, but they can quickly become just as confusing. if you want an index hugger, how can you allow for diversification and risk management? Joining me today to unravel the intricacies of ETF investing is Vince Scully G'day. Vince

Vince (1m 3s):

G'day Phil

Phil (1m 5s):

Vince. Scully is the CEO and founder of Life Sherpa Australia's most affordable online advice. So let's get started. Why should investors use ETFs rather than a well-diversified portfolio of handpicked individual stocks?

Vince (1m 21s):

That's a great question. Hmm. But it's possibly not the question you should be

Phil (1m 24s):

Stoking. I always do this Vince,

Vince (1m 27s):

I'm liken that question to walking into a bottle store and saying, should I buy bottles or cans? And that's a question you can only answer when you wanna know what you wanna drink and where you wanna drink it. you know, if you're going hiking, you probably want cans and beer. If you're having a steak at home, you probably need a bottle of Shiraz. So step number one is work out what it is that you're trying to achieve.

Phil (1m 50s):

Can I just interrupt here for a Sure. Because I've had some experience with the Australian, Shareholders Association and a lot of those investors have been investing for a long time prior to ETFs and a lot of them have become very, very wealthy by just having a very good portfolio of stocks that they've selected themselves and which they continue to weeded over a period of time. And

Vince (2m 13s):

There's no doubt that that can work. People, the real challenge is that you're not being rewarded for the risk that you are taking when you pick a single stock. You are getting market risk, you are getting industry risk, but you are also getting idiosyncratic risks. So what is it about that particular stock will behave differently than might sometimes differently good, sometimes differently bad. you know, Australians love to pick their bank stocks, but only two of the banks have performed the ASX two credit in the last 20 years. So the fewer stocks you hold, the more risk you take that you're not necessarily being rewarded for, you might win.

Vince (2m 56s):

And it is possible with the right level of research and focus to earn a higher return. Whether it's possible consistently, particularly for an amateur, is a much more nuanced question. And the fact that they got very wealthy doing it, you've gotta ask compared to what? So what's the counterfactual? Would they have done better or worse with the alternative and the truth is it? 'cause we will never know. So yes, you can do it, it's hard to work, it's more expensive and you obviously need to get some form of diversification.

Vince (3m 39s):

And diversification doesn't mean packing four banks and, but once you get to 20 or 30 stocks, most of that idiosyncratic risk has disappeared. So buying 30 stocks is probably not a lot of difference to buying the whole index as long as you are picking a representative. So, and rebalancing of price. So it's about return for effort and return for risk. Clearly ETFs are not the only gaming and not necessarily the best. But what we do know is that all of the research is that it is extremely difficult to help perform an index by buying those same components or a subset of those components and trading them after tax and after fees.

Vince (4m 35s):

And if you are, you are probably buying a factor. And if by a factor, I mean, you know, big companies versus small companies value stocks versus growth stocks, high basis stocks versus low basis. And most portfolios that do outperform outperform because they're taking one of those factor risks. So a portfolio that's knee deep in banks is by definition of value portfolio in an Australian context, which you would expect over time to outperform the index as a whole, but not necessarily consistently. So you couldn't say that it will this year or it will next year, but over time, yeah, small companies should outperform big companies, valued companies should out outperform growth companies and high basis stocks should outperform low budget stocks.

Vince (5m 29s):

That's just maths. And so you just need to be careful, you know, are you the next Warren Buffet because you picked the right five stocks or did you just buy value? And most individual stock pickers tend to have a value bias because they're looking to buy undervalued stocks, which usually have a value flavor to them. And that's presuming that you've got a methodology for finding this value as well as opposed to a dark board. Hmm.

Phil (5m 57s):

As opposed to a up.

Vince (5m 59s):

So all of that says, well if that's all hard work and has a high probability of not outperforming after fees and taxes, why wouldn't I just buy the index? Which G leads us into a whole bunch of other questions.

Phil (6m 12s):

Well that's right. That's my next question. The index hugging ETF, what's its characteristic, And, what should people watch out for that might not be aiding their ability to make money?

Vince (6m 23s):

The first step in all of these things is asset allocation. And by that I mean the allocation of your cash between the various asset classes. I call these the five Bs of investing. So on the growth side there's stuff that can outperform inflation. We talk about bricks and businesses. So businesses are equities, B bricks, real estate and infrastructure. And then on the defensive side we have bullion being gold. Generally bonds and builds been cash and whatever you invest in it's, it's just a mishmash of all of those or some are all of those. And choosing the right one is about getting the right risk profile to align with your personality and goals and the right return, which will then lead you to an asset.

Vince (7m 12s):

So assuming you've decided I need 40% in Shares, then I need to work out, well how much of that is in Australia? How much is overseas? How much is in small companies? How much is in big companies? And once I've done that, then I say, well let's assume we wanna put 30% of that in Australian large company Shares. So how do I now invest in Australian, large company Shares, I could go and buy them individually as you suggested I could go and buy it to managed funds or I could buy an index part. If I want to choose an index fund, I have to make sure that there is an index that's both tradable and and representative for what I'm trying to invest. And so for Australian large cap, we're probably talking the ASX 200, which is the, the liquid one or the ASX 300 there,

Phil (7m 58s):

Even the ASX 50

Vince (7m 60s):

Or it's a little less liquid but, and there is, I think there is any tip to trades the 50. And then having identified an index that tracks the class you are looking at, you then need to say, well do I buy that as a managed funds or do I buy it as an ETM? And there are some tax Ian having ETF, they're accessible through most to on the ASX through brokers and so convenient and easy to buy. And now that brokerage is getting to be very cheap

Phil (8m 31s):

And the management expense actually becoming very

Vince (8m 34s):

Expensive, that's becoming the preferred way to access index. So for Australian Shares, you are probably looking at ASX 200, 300 following investing us large cap. Probably looking at a, a NASDAQ or an s S&P 500. If I'm looking at global Shares, I'm probably looking at an MSCI developed index,

Phil (8m 55s):

Also known as MSCI

Vince (8m 56s):

Or mis. Yes. When it comes to other asset classes, like trading small caps for example, once you get outside the 300, there is no tradable index. So how do I invest in Australian small caps then? Well, A, there's no index and B, there's a lot of evidence that shows that active managers can add a lot of value. So if you were investing outside the ASX 300, you almost certainly want an active manager And that leads you into a whole bunch of, yeah, what is their philosophy? Are they a value manager, are they a opportunistic manager? What's their investment philosophy and who's the team?

Phil (9m 39s):

And it's much more based on individual. 'cause I've been to a small cap conference recently and me meeting a couple of small cap fund managers and you've really gotta trust what they're doing and their ability to do it and their talent for doing it as well in choosing these companies because it's very, very difficult.

Vince (9m 56s):

It is make

Phil (9m 57s):

A small cam, there's the re the rewards can be excellent.

Vince (9m 60s):

You get wild, big swings, So, it certainly adds volatility to your portfolio. But you know, it's much easier to double the value of a $50 million stock and a $500 billion

Phil (10m 12s):

Stock. Yeah. Mature, yeah. Heavyweight in the Index so

Vince (10m 16s):

You obviously don't wanna be punting everything on that category, but it's a, it should be part of your allocation. So within your company you wanna have some in small, something big, some in overseas, some in value, some growth.

Phil (10m 30s):

You're talking about asset allocation, aren't there ETFs that give you a diversified portfolio across all of those assets?

Vince (10m 37s):

Right. There are,

Phil (10m 39s):

And you know, Vanguard lose us a

Vince (10m 40s):

Vanguard have four at various levels of risk. And that's certainly a good way to get your allocation in a single trade. But you do need to be sure that that asset allocation is what you want. Because remember asset allocation is 90% of your long-term returns. The rest is sort of noise. And so if you wanna buy VDHD Vanguard high growth fund for example, oh that's a 90 10 fund. So 90% growth, 10% bonds, I can't remember what its global domestic split is, but it does hedge some of the overseas exposure. So by choosing VDHG as your diversiew portfolio, you are buying into that particular asset allocation and you know, well is that, is that what you want?

Vince (11m 28s):

Personally, I'm not a fan of hedging equities in my view is that part of why you are buying global equities is to get currency diversification. And so by hedging the

Phil (11m 38s):

So so hedging is just when you Yeah, so If you have everything element where it's converted into our mobile currency. Yeah,

Vince (11m 43s):

So, so remove

Phil (11m 44s):

That.

Vince (11m 45s):

Yeah. So I usually they will buy some sort of derivatives or P about to try and remove the impact of moving Australian dollar. Obviously if the Australian dollar falls in value, which it's done over the last year, the value of your overseas asset goes up. And if you hedge it and you'll lose that upside. On the other hand, if the currency goes Australian hedge it goes up, the value of your overseas assets will fall. The interesting thing is that when times get tough and markets decline, quite often the Australian dollar also declines because money moves to the safe haven.

Vince (12m 28s):

The US dollar and the Australian dollar is very much a commodity currency. So when markets are booming, commodities are booming. Australian dollar rises. So hedging is a cost that we don't believe that you should be spending. Bonds are different. So if you buy overseas bonds, you should be hedging that 'cause bonds are about giving you defensiveness. So you don't want currency risk. And historically the hedge has also increased your yield because Australian interest rates are usually above global interest rates. That's not true at the moment. So we are actually below the US at the moment, which is that historical anomaly. So short answer is yes, it can be a quick way of getting a multi-asset class option as long as that's the allocation that you actually want

Phil (13m 17s):

Or need or requirement for the best result. Yeah, that's

Vince (13m 19s):

Right. And the products like the Vanguard one have a very, have a stable asset allocation. A lot of multi-asset funds have variable splits. So they try to time the market by moving the asset allocation. That's what's called tactical asset allocation, where you move it in response to the markets. Mm. What is the asset allocation that they're offering you and does that align with what you want? And are you going to get it all the time?

Phil (13m 46s):

So it is the major function that you've gotta think about is your age.

Vince (13m 50s):

Age is important,

Phil (13m 50s):

But not the only factor, but

Vince (13m 52s):

Not the only factor

Phil (13m 52s):

Of course I would,

Vince (13m 53s):

Would, would generally start with risk profile. So how tolerant of are you of risk and how, what's your capacity to wear that risk? And so risk is around a variability of outcomes. So people sometimes think about risk in the stock market as the risk of the company I'm buying going outta business.

Phil (14m 15s):

And you lose all your dollars, you

Vince (14m 17s):

Lose all your, whereas risk is really bad, the probability of me achieving my goal. And

Phil (14m 23s):

I go, that's another definition of risk you've just thrown in there and and because yeah, the finance industry thinks that risk is the same as volatility. That's amount of goes up there.

Vince (14m 31s):

Well they they do, but yeah. But they do sort of align because the greater the volatility or variability returns, the greater the variability in your end goal. So if your goal is to achieve $50,000 in 10 years time, the ending value is a function of volatility

Phil (14m 49s):

Whereas ended up at that

Vince (14m 51s):

Particular point in time. Yeah. What, yeah, what, what's happened on the, you read three 650th day and how critical is that day to your goal? So volatility matters. People will say, oh, volatility doesn't matter unless you sell. But whilst that might be true on a specific day that you haven't crystallized the, this variability, when you are looking forward to achieving a goal, the range of outcomes in 10 years or whatever will be wider, the higher the volatility. So volatility does matter, but not for the reason most people think. And of course return comes with volatility. Higher the return you expect, the higher the volatility you have to tolerate.

Vince (15m 31s):

So that goes to what's the probability of me achieving my goal, And, what is the risk that I will, my emotions will get in the way of me staying course. So a hundred percent equity portfolio will have the highest expected return, but the volatility that it comes with is significantly higher than say a 90% equities portfolio with a bit of infrastructure and a bit of real estate, which for by moving down, you reduce the variability and you don't give away too much on the expected return, but you narrow the gap and you increase the likelihood that you're gonna stay.

Vince (16m 13s):

Of course that's the secret success in idiot best. So having some sort of ballast in your Yeah. Portfolio. Yeah. So along with your tolerance and ability to, yeah, bear and of course last 15 years or 13, 15 years since the GFC, we haven't really had a massive long lasting downturn. So if your only experience of investing is the last 15 years, everyone's asking them, well why aren't I a hundred percent growth? And that's fine, we do have a downturn and then you know, you'll, many people will give up that won't actually achieve that extra return because of their behavior along the way. So you know, when I'm talking to our members about investing, you know, one of the things that the market's gonna give you the return, my job is to make sure that return ends up in your pocket.

Vince (17m 1s):

And the reasons it won't end up in your pocket is that people tend to invest more when markets are going up and invest less when markets are going down. Whereas you should be doing the opposite. And people do sell when they shouldn't and people try to second guess when they should rebalance going, oh, I should let this growth run a bit more because the market's going well. And those emotional behaviors are what makes the difference between successful investing and less efficient investing. And so the price that you pay for that will more than reward you

Chloe (17m 36s):

Are you confused about how to invest life Sherpa can ease the burden of having to decide for yourself head to life Sherpa dot com au to find out more life Sherpa Australia's most affordable online financial advice.

Phil (17m 53s):

Just speaking about the idea of bonds and real estate providing some sort of balance in your portfolio. Has that, that's actually not been the case over the last couple of

Vince (18m 1s):

Years. Yeah, actually that So,

Phil (18m 2s):

It hasn't actually helped out. No.

Vince (18m 4s):

In fact, if you've been in bonds have had a horrible run over the last few years as interest rates have moved back to something more normal,

Phil (18m 13s):

Don't try and explain how bonds work. That's a whole episode, isn't it?

Vince (18m 17s):

So generally interest rates go up, the value bonds go down and sometimes that's what you want because generally interest rates go up in a time of

Phil (18m 26s):

Inflation.

Vince (18m 27s):

Yeah. So that's where Shares should benefit, particularly real estate and infrastructure should benefit from inflation. But you're right, so bonds have had a horror year, I think 20 23, 20 22 was the first year where both US bonds and the S&P500 both returned double digit negative returns, highly unusual. And similarly with real estate and infrastructure. I mean both of those were rrrrrr. During covid obviously people stopped drive driving their toll roads, people stopped going into the office, people stopped visiting shops. So property values plummeted. It is phase

Phil (19m 2s):

Of assets are written down. Yep.

Vince (19m 4s):

Now, so that was all. So both of those were negative when you would expect them to have been a bit less volatile when covid hit. And neither really recovered that well because both are interest rate sensitive. Hmm. And I think there's still a lot of question marks about where particularly commercial and retail real estate will settle. So yeah, there's a reason why we say past performance is no indicator of future performers. And that's because you can use yesterday's returns to predict tomorrow's returns. But why we look at the past is that it tells us about how things behave generally and how things behave relative to each other.

Vince (19m 47s):

It doesn't mean that they'll always do that. This is a game of probabilities. And so you would wanna try to stack the deck in your favor. You'll be right all the time if you were, there'd be no risk and therefore no return. So it's about going well. We would generally expect bonds and equities to move in slightly in different directions. We would expect real estate to be less volatile than shares. We would expect infrastructure to perform well during inflation and badly trend rising interest rates. We would expect gold to be a safe haven. And you can certainly see that in the covid Dipper If.

Vince (20m 27s):

you go back to February 21st, 2020, the market peaked and dived and then sort of recovered by June 30. But the gold line just goes straight across that deep v So. it doesn't mean it's always gonna do that. Yeah. But this is about stacking the tech in your favor and making sure that you're being rewarded for the risk that you're taking. And so we talk about risk adjusted returns. And so per unit risk, you take a 90% growth portfolio should give you a higher risk adjusted return than a hundred percent. One. That doesn't mean it'll give you a higher return, it just means that the reward you get for that extra little bit of risk is lower than the risk you, the return you got for the previous 10% risk that you took.

Vince (21m 17s):

And so when you are choosing to invest, you need to decide what you're trying to achieve. So it is your goal just to get the highest return possible.

Phil (21m 29s):

But that's what most people would say by default. Yeah. They just want the highest return. Yeah.

Vince (21m 33s):

And the consequence of doing that is you are gonna therefore take higher risk with all the baggage that goes with that. The alternative is to say, I want to take just enough risk to achieve my goal. So if I need a 5% return to achieve my goal, do I really need to invest in a hundred percent equities, which might give me a nine or 10 expected return, but could give me Yep. Negative five too, depending

Phil (22m 5s):

Particular point in time. Yeah.

Vince (22m 7s):

Or the third option is here, do I wanna take, do I just get the maximum return for the level of risk I'm prepared to take? And that's sort of the sweet spot in the middle. So it's that balance between expected return and volatility and the allocation across these asset classes is how you will lower your volatility for any given.

Phil (22m 30s):

Mm. I know you're a big fan of the FIRE movement and you lurk in worm in chat rooms about financial independence. I've, I've

Vince (22m 38s):

Had my own odd argument with Software Bros on Reddit.

Phil (22m 42s):

There's a belief amongst many in those community that okay, you might be a PAYG salary owner And, that you want to start investing outside of super And. that the easiest way to do it is to do it straight into an index hanging ETF. Whether it's an Australian one or an international one, it's, but you think it's more complicated than,

Vince (23m 2s):

Well it's more nuance. It's gonna work, it's more

Phil (23m 3s):

Nuance's will work in the long term.

Vince (23m 5s):

Yeah. So If you, If you looking, if you go, if you go and buy VDHG, you're not gonna go broke. You're gonna be better off than if you not invested. Hmm. The argument and

Phil (23m 15s):

Dollar cost average into it. Yeah.

Vince (23m 16s):

Yeah. So all of those things, you know, they're all better than spinning it in the pub on a Friday night. There's no one's gonna argue with that.

Phil (23m 24s):

The margin marginally better.

Vince (23m 25s):

Right. The nuance though is are you taking more risk than you need to take for that return? Mm. And will your behavior actually allow you to be that return?

Phil (23m 42s):

So you're not gonna jump jump as

Vince (23m 45s):

Soon as it goes. We have another, and I have yet to see a DIY portfolio that couldn't be re improved either in same return for lower volatility or higher return, same volatility. And that's, I think the, the key to it. So if you read JL Collins for example, he's written a book called A Simple Path to Wealth. And so his view is that you should hunt it all on VTSAX, which is the US equivalent of VTI. So it's a US total start market return. He, he leaves out the US bit and just calls it a total stock market.

Vince (24m 25s):

But of course that's the, the American-centric view of the world. But that will lead to a lower return at higher volatility than a diversified portfolio construct properly. So the book is called A Simple Path to Wealth, not the Optimal Path to Wealth. And so clearly if you put enough money aside, it will work. Could you get the same result by putting less money aside? The answer is yes. That's the key to this, that planning If you money is a series of trade-offs. So if we talk about planning for retirement, that's a trade off between how much I spend while I'm working against how much I spend when I'm retired.

Vince (25m 7s):

And there's two ways you can do that. One, I can save more and therefore spend less while I'm working or I can get a better return. And I like to use the term better return rather higher return because it, it brings that risk and variability. Oh, you put a value judgment on it, don't you? I mean it's not my value, it's the investor's value. My appetite for risk and my stage of life is not necessarily the same as laws or, or the investor. A 20 year old with $5,000 to invest probably has an entirely different profile than a someone two years out from retirement with a million dollars.

Vince (25m 50s):

You know, the consequences of getting it wrong are entirely different. Hmm. The upside of hunting everything on some lithium stock on five grand might very well outweigh the, the risk of toasting the entire $5,000 when you're 25. But that's not the right answer when you are 65 or you are 30 and saving fewer kids high school fees where you can't change the year that Sophie starts year, year seven just because the market team. So that's an entirely different saving of objectives. And yeah. So you've got three broad levers you can pull.

Vince (26m 30s):

Yeah. How much do I save? So how much do I set aside? How long am I gonna set it aside for And what return I can expect? And the more you want return, the more of the heavy lifting you want the return to do, the more risk you have to be prepared to take and the more uncertain achieving that outcome is. So you can move any two of those three levers. And that's the real piece about investing that a lot of people jump straight for, I've got $5,000 to invest, what should I buy? Whereas

Phil (27m 4s):

There's a couple of

Vince (27m 5s):

Steps between, there's a lot of steps in the way. Yeah. And the answer will not be the same for everyone.

Phil (27m 11s):

So what about someone who's say in their forties, fifties and who is starting to invest on the side out of their superannuation? Should they be looking at the, the old 60 40 portfolio, you know, 60 in

Vince (27m 24s):

Yeah.

Phil (27m 25s):

Equities and 40 in bonds or something of that nature?

Vince (27m 28s):

The, the 60 40 portfolio has been a bit of a, a casualty of the easy money over the last few years. So if you are only experience of investing these, the last 15 years, 60 40 looks pretty

Phil (27m 43s):

Dismal.

Vince (27m 43s):

Dismal. Mm. It's pretty conservative but you know, it's worked really well for the last 80 years for the right person. So that's a bit of a Yeah. The old rule, when I went to business school, that was a rule that says you should have a hundred minus your age and bond. That's

Phil (27m 57s):

Right. Yeah.

Vince (27m 58s):

Which says that if you are 65 you should have 35% in bonds. Which is probably not a bad answer if I, sorry, that's the other way around. And that in Shares 60, a hundred minus your age. Yeah. It doesn't work work though for a 20 year old. Yeah. Yeah. So, you know, most of these rules of thumb don't actually survive extremes. So if you are 20 in your saving by your first home and you wanna do that in five years, well maybe a hundred percent equities isn't the right answer unless you are prepared to make five years, seven years of the market tanks or buy a smaller house in year five and state uncertainty over the price of a house might be bigger than the uncertainty of that outcome.

Vince (28m 42s):

So that's why what input you're saving this money for will really tri. And of course you are 65 year old about to retire, probably doesn't have a lot of capacity to recover. Mm. And so the consequence of being in too much growth at a bad time in market early in your retirement means you get to spend less for the next three, five years.

Phil (29m 4s):

So, or work for another year or two.

Vince (29m 7s):

Yeah. Which is easier said than done. And yeah, it's easy for a 40 year old to say that, but you know, two thirds of Australians retire at a time not of their choosing. So you might not actually have the opportunity to work those two years. And that's either because you know, they get crook redundant

Phil (29m 26s):

Skill. Yeah,

Vince (29m 27s):

Yeah. So, or family circumstances, you know, you might have a caring, caring responsibilities either parents or spouse. So it's easy to say, oh just work there. We use when you are 40, doing that in reality at 65 can be, can be harder. Which is probably why our average retirement age is still in the late fifties. That's probably not 'cause people are choosing to do that. It's that just, just how it works. And so understanding yourself is almost more important than understanding the market. You can buy market expertise but it's hard to buy understanding if you sell it

Phil (30m 3s):

The level of the ASX 200 or the all ords, whichever measure you want take. Yep. Hasn't changed. I mean we're basically at the same level as in 2007. So obviously dividends have played a huge role in the returns. Would you be as well off if you just took the dividends every year and didn't reinvest them? Would you be, basically, would your money have eroded in value over that time sitting in an ETF like that?

Vince (30m 29s):

Well your capital would largely be able to change. I think the level is actually about the same now as simple wasn't in 2007 and the gove sideways for long periods of times. That's not, of course it's been up in the meantime. Not

Phil (30m 43s):

That, not that, not that much further up. I mean it hasn't, hasn't yet 8,000. No, that's true.

Vince (30m 49s):

But our market is very much a dividend driven market. Mm. So you can't really compare that looking at price indexes. Ores is a very dangerous way to look at. I always look at the accumulation index and which includes the dividends. Yeah. It doesn't include the value of franking though, which is, you know, particularly important for retirees

Phil (31m 11s):

And harder to work out. 'cause it depends on, yeah, tax are almost

Vince (31m 14s):

Impossible. So you would still have made, you know, five, 6% of your money in an era of 3% inflation, that's 2%, that's not a bad. And you'd throw in a bit of franking. That's certainly not insignificant. I mean, what's the alternative? Sticking to the bank and make one over that period or two. So yeah, you need to be over any long-term investment horizon. You need to be substantially in growth investments, which are investments that are capable of delivering a return in excess of inflation. They don't always, I if you were a Japanese investor in 1989 on a accumulation basis, you are now ahead.

Vince (31m 58s):

But you know, it took decades. 1929 to 1942, you know these, there are sometimes big cycles in markets. The Australian stock market has returned an average annual return of 13% for 122 years. if you invested a hundred dollars on the 1st of January, 1900 and kept it till today, you would've realized 10% because of the ups and downs. And there's only one year where the return was actually 13%. Don't ask me when it was, but there's only been one year. We've had 23 of those 122 years have been negative. 23 of them have been more 24% plus.

Vince (32m 39s):

So there is a reason why you get a return above inflation and that's because you're taking a risk and that's a risk that you have to take because the alternative of having inflation wiggle away your money is just so unpalatable. Mm. So there's many products where you can get a portfolio set up for you based on your needs and so forth. And Life Sherpa. Yep. Has these, let me just check the Life Sherpa Smart Investment Portfolios. Tell us, tell us about those. So, so we offer four managed portfolios of largely ETFs and we eat our own cooking here. So yeah, these are portfolios that we started with a asset allocation in mind and then built a 90% growth, a 70% and a 50% growth portfolio to suit various people's needs.

Vince (33m 29s):

So they're composed largely of ETFs with the exception of small caps, small caps where we use a couple of active manage. We have two in that category to get complimentary investment philosophies. But yeah, we've done allocation to 300 S&P 500 in the US MSCI, global sort emerging markets, infrastructure, real estate, gold, bonds, and a little bit of catch. And you can just go buy direct or you can talk to an advisor and work out what the right answer for you is. But it's certainly been designed that somebody can, you know, use the risk profiler on our website, use our money personality test and choose their own portfolio.

Vince (34m 17s):

And you can we'll recommend those tools. Will recommend a portfolio. Well, they will, they will give you the information to allow you to do that. We will roll out a, a robo advice piece in the future, but Right. Now I hate that term. Yes, I does like it and I prefer the the term investbot, but that will help you choose. But right now you can just go and pick one up, the four for yourself and competitively priced for a managed individual portfolio. And what's the URL? That's, so they've the Invest Live Sherpa au. You can actually get there from an ordinary homepage, which is live shepa.com au. And just click on the get started now book.

4 (34m 56s):

Fantastic. Vince Scully, thanks very much for joining me today.

Vince (35m 0s):

Thank you very much Phil.

Chloe (35m 2s):

Thanks for listening to Shares for Beginners. You can find more at Shares For Beginners dot com. if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

Any advice in this blog post is general financial advice only and does not take into account your objectives, financial situation or needs. Because of that, you should consider if the advice is appropriate to you and your needs before acting on the information. If you do choose to buy a financial product read the PDS and TMD and obtain appropriate financial advice tailored to your needs. Finpods Pty Ltd & Philip Muscatello are authorised representatives of MoneySherpa Pty Ltd which holds financial services licence 451289. Here's a link to our Financial Services Guide.